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The Catch-22 Advantage

When you think about it, our credit reporting system provides little incentive for you to pay off your debt. If you ignore the debt long enough, you stand a good chance of never hearing from the creditor again. Seven years after the debt is written off, the negative listing disappears from your report altogether. But if you pay the debt sometime before the end of that period, the seven year cycle starts all over again— not exactly what one would call an incentive. It's like getting time added to your sentence for good behavior.

Fortunately, creditors make their money by collecting the debts, not by reporting negative credit information. Creditors recognize this catch-22, and are therefore often willing to delete the negative listing upon settlement. If you are going to settle with a creditor, be sure to negotiate removal of the listing from your report.

Collection agencies are always more agreeable to delete a negative listing than are banks or credit card issuers. The only time you might run into problems is when the collection agency represents a large institutionalized creditor. Many creditors have an agreement with the credit bureaus that they will not allow a negative listing to be deleted upon settlement. Larger creditors such as the credit card giants or banks will require considerably more pressure before they give in to your demand. Virtually every creditor will succumb given the right amount of convincing.

Every creditor who reports to the credit bureaus can also change the information they report. In most credit organizations, there are dozens of people with the authority to make changes on the credit report. Anything a creditor reports, a creditor can change.

There are two ways you can approach deletion of negative information in response to settling a debt with a creditor: pre-notification of terms, and post-notification of terms.

Pre-notification of Terms

In this scenario, you tell the creditor up-front that you require the deletion of the entire negative listing as a part of the payoff. Definitely obtain this agreement in writing before the payoff takes place.

Advantage: You will save yourself time and frustration. There is also less of a chance that you will have to fight the creditor later to actually delete the negative listing.

Disadvantage: If the creditor discovers that your credit is important to you, they may change their mind and demand a larger settlement amount— sometimes as much as the full balance.

Post-notification of Terms

Once you have concluded your negotiations with the creditor, you include a "conditional endorsement" document with your settlement check. This document, which should be drafted by your attorney, informs the creditor of your terms for settlement. In your case you will insist that you are settling the debt on the condition the creditor delete your negative listing.

Advantage: Most of the time you will get a more favorable settlement amount this way. The creditor is often sufficiently tempted by the payoff that they deposit the check without blinking at the new terms.

Disadvantage: The creditor could reject your terms and return the check to you. Subsequently, the creditor might ask for more money or re-neg on the deal altogether. In the worse case the creditor deposits the check without following through with your demand. You will then have to fight the creditor later and force them to delete the listing.

Never expect a creditor to meet a verbal agreement. Document everything in writing, no matter how "good" you feel about the representative you speak to. You will likely have to fight the creditor to get them to live up to their end of the bargain, even when you have written documentation.

You may find that some creditors refuse to agree to a deletion under any circumstance. Yet every creditor will eventually agree to your terms if you speak to the right person or hold off long enough. But if you are on a time-line and your attorney is unable to obtain an agreement for full deletion, there are a couple of other options you have.

List Account as PAID

You may counter-offer that the creditor list the account as "Paid" rather than delete the item. After all, this would be an accurate indication of the status of the account and many creditors agree to this wording. Note that a "Paid" status is still very negative for a collection account. You should only agree that the account show "Paid" if all other negative notations are deleted. These notations include charge-offs, repossessions, late notations, and collections. A simple "Paid" notation on a regular trade line is neutral and should not impact your credit negatively.

List Account as SETTLED

Another option is to have the negative item listed as "Settled". While this is an inherently negative listing, it is not as negative as "Paid charge-off." Don't agree to a "Settled" listing until you have exhausted all other possibilities. Because "Settled" still triggers a credit denial, you should only agree on this type of listing if all other negative notations are removed. These notations include charge-offs, repossessions, late notations, and collections. If you agree to a "Settled" notation, you must continue to work hard to delete the notation through the credit bureau dispute process.


Finally, you can counter-offer to list the account as one of these. Note that this will be the creditor's first choice, and should be your absolute last. These notations are almost as damaging as showing "Unpaid" status. It is not unusual for an account to be deleted through credit bureau disputes once it has been paid. The creditor then has no compelling reason to keep the negative listing on your report. For this reason, it is still usually a good idea to settle even when the creditor will not budge on deleting or positively modifying the negative listing.